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Nestle posts 18% profit rise, launches $21 billion buyback

World's largest food group lifts revenue, margin outlook

By

AudeLagorce

LONDON (MarketWatch) -- Nestle SA, the world's largest food company, on Wednesday posted a better-than-expected 18% rise in first-half profit, lifted its outlook and announced plans to buy back 25 billion Swiss francs of stock ($21 billion), sending its shares up as much as 8%.

Net income at the maker of Dreyer's ice cream and Nescafe coffee improved to 4.92 billion Swiss francs, or 12.06 francs a share, from 4.15 billion francs, or 10.65 francs a share, a year earlier.

Sales climbed 8% to 51.1 billion francs as the company pushed through price increases to offset rising input prices for agricultural commodities such as coffee. The average forecast of analysts polled by Dow Jones Newswires was for net profit of 4.59 billion francs on sales of 50.48 billion francs.

The operating margin improved by 0.6 percentage points to 13.5% during the half-year.

Turning to the outlook, Chief Executive Peter Brabeck-Letmathe said Nestle will post forecast-beating revenue growth this year. He also predicted higher margins as the company continues to pass on higher milk, sugar and coffee prices to customers.

On a conference call, Chief Financial Office Paul Polman said he expects organic growth to approach 7% and margins to be up "slightly more" than the current consensus estimate of 0.3 percentage points for the full year.

Nestle also launched its largest-ever buyback, saying it will repurchase 25 billion francs of stock over three years.

Nestle (001205604)
NSRGY, -0.26%
shares were up 7.9% at 487.50 francs in Zurich mid-afternoon trading. They touched a high not seen since April, when they reached 492 francs.

Analysts for Natixis called the results "remarkable", noting the forecast-beating organic growth, strong operating margin and the share buyback.

The company said the buyback decision reflects the "strong momentum, improving capital efficiency and future prospects" of its food and beverages business, which it said is increasingly benefiting from the move towards nutrition, health and wellness.

Nestle recently expanded its nutrition business with the purchase of Novartis's medical nutrition and Gerber baby food businesses for a combined $8 billion earlier this year. See full story.

Bear Stearns analysts also welcomed the "watershed set of results", which it said gives further evidence that the past year's product repositioning in higher growth and healthier segments has been successful.

Numis analysts noted that costs saving potential "remains huge" but it doesn't believe the group is really tapping this opportunity.

Nestle passes on raw material increases to customers

The bulk of the sales growth came from Eastern Europe, North and Latin America and emerging markets in Asia, Africa and the Middle East. Growth in Western Europe was slow as the company focused on restoring margins, which improved by a half percentage point.

Costs for agricultural commodities have been rising strongly as Indian and Chinese demand climbs. Nestle has hiked prices of Dreyer's ice cream and other dairy products by as much as 10% in 2007.

Brabeck-Letmathe cautioned that the volume growth may slow in the second half because of these price increases and that higher raw material costs, especially for milk, would pressure profitability.

Polman said on the call he believes milk prices could start declining in 2008.

Despite increased investment in some of its brands, Nestle managed to slash marketing and administrative costs. They dropped by 0.8 percentage points due to the good management of trade spend and economies of scale, the company said.

In July, the Wall Street Journal reported that Nestle had held merger talks with PepsiCo
PEP, +0.37%
this year after it was approached by the drinks company. The talks reportedly collapsed because of Nestle's concern that a deal with Pepsi would dilute its mission of selling healthier food and drinks.

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